Alaska Communications Systems Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 3 Aug 2017

[Operator:]

Good day and welcome to the Alaska Communications Systems Second Quarter 2017 Earnings Call. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Tiffany Smith, Manager Investor Relations. Please go ahead, ma'am.

[Tiffany Smith:]

Thank you. Welcome to the Alaska Communications second quarter 2017 conference call. I'm Tiffany Smith, Manager of Investor and Board Relations. With me today are Anand Vadapalli, President and Chief Executive Officer; Laurie Butcher, Senior Vice President of Finance; and Leonard Steinberg, General Counsel. During this call, we'll be using a slide deck that we'd encourage everyone to have available. For those listening to this call via the webcast, the presentation will be presented on your screen. For others, you can go to our investor website www.alsk.com, click on the Events section, go to the second quarter 2017 earnings call event and click on the PDF version of the presentation. We will indicate which slide we are discussing so you can follow the presentation material throughout the call. Now, as we get started, please review Slide 3 for our Safe Harbor statement. During this call, Company participants will make forward-looking statements as defined under U.S. securities laws. Forward-looking statements are statements that are not historical facts and may include financial projections, estimates to shareholder returns, or other descriptions of the Company's business plans, objectives, expectations, or intentions. You are cautioned not to put undue reliance on forward-looking statements as actual results could differ materially from expectations as a result of a variety of factors, many of which are outside the Company's control. Additionally, any non-GAAP measurements referred to during this call have been reconciled to their nearest GAAP measure. You can find these reconciliations in the appendix to our presentation and on our website. Following our remarks, we will open the line for questions. With that, I would like to turn the call over to Anand. Anand?

[Anand Vadapalli:]

Thank you, Tiffany. Good day and thank you for joining us. Starting with Slide 5, one again we continued to make steady progress to our business plan. Our key operating metrics grew on all fronts, driven primarily by our performance in business and wholesale which grew 8.1% and total broadband which grew 13.9% on a year-over-year basis. Let me provide some color on our operating performance. Business sales continued to exceed our internal targets and we are sitting on a robust delivery funnel that gives us good revenue visibility over the upcoming several quarters. As Laurie will discuss further in her comments, we’re navigating changes in funding levels for the rural healthcare program at USAC and mitigating these impacts with attention to cost management and our performance more broadly in the enterprise segment. As I look beyond the next couple of quarters to the next couple of years, developments on our network front give me optimism about our continued growth opportunity. First, we've been successfully trialing and piloting fixed wireless in our access network. We are using both unlicensed 5.2 gigahertz and likely licensed 3.5 gigahertz spectrum for our deployment. Fixed wireless has come a long way over the last several years and represents one use case in the 5G ecosystem. We see good momentum behind fixed wireless equipment development and believe this will be an important access technology for us including in the [indiscernible] program providing a cost effective and highly competitive solution for years to come. Second, I continue to be very encouraged by the progress being made to bring fiber connections to northwest Alaska by the end of this year. This activity will open up several markets for us that today are underserved by monopolistic providers. Opportunities in the enterprise space including federal agencies, healthcare, public safety, and Alaskan Native Corporations will drive our performance in these Arctic markets. Lastly, we are making a strong push to develop satellite capability to supplement our wireline network. Given the unique geographic considerations of Alaska, we are acquiring transponder space in the C-band in the near future. While we recently signed a Memorandum of Understanding with OneWeb for its Low Earth Orbit or LEO satellite solution. We see satellite as an excellent complement to our network, enabling access to remote locations and furthering the reach of our terrestrial network. These network initiatives will extend our reach providing continued opportunities for growth in the years ahead. We will update you on our progress over the coming quarters. Let me conclude this section of my remarks by noting that on August 1, we welcome Shawn O'Donnell to our board. Shawn has significant sector knowledge and with his recent work on the board of Lumos Networks, he brings board level experience in driving shareholder value through strategic transactions. We appreciate being introduced by Shawn by one of our largest shareholders and look forward to his contributions as we continue our journey of shareholder value creation. With that let me hand the call to Laurie. Laurie?

[Laurie Butcher:]

Thank you, Anand. Turning to Slide 7, let me start with our year-over-year performance for the quarter and year-to-date periods ending June 30. Total revenues increased 4% percent in the second quarter and 2.4% year to date reflecting total broadband growth of 13.9% for the quarter and 12.5% year to date. Business and wholesale representing 62.5% of our total revenue grew 8.1% in the second quarter and 5.5% year to date, with business broadband showing growth of 16.7% in the second quarter and 14.9% year to date. Consumer revenue representing 15.8% of our total revenues declined 2.4% in the second quarter and 2.2% year to date. However consumer broadband grew 3.6% for the quarter and 4.1% year-to-date. On a sequential basis, consumer revenues were essentially flat, now representing three consecutive quarters of stable performance. Regulatory revenues representing 21.7% of our total revenue declined 1.8% in the second quarter and 2.4% year to date. In April of this year, USAC which administers the Federal Rural HealthCare Program issued a notification the demand for rural healthcare support had exceeded the program's 2016 funding year cap of $400 million. Consequently, certain rural healthcare providers would only receive 92.5% of the funding previously approved. The 2016 funding year runs from July 1, 2016 through June 30, 2017. This is the first shortfall in the program's history. On June 14, we notified our affected customers that given certain criteria we would not seek to collect the funding shortfall from them. And in the second quarter we recorded 1.1 million in accounts receivable reserves representing 100% of that funding deficit. To-date, the 2017 funding year levels have not been announced and we will continue to monitor this issue going forward. Turning to Slide 8, adjusted EBITDA reached 14.6 million for the second quarter and 28.8 million for the first half of the year and increased 4.4% and 3% compared to the same periods in 2016. For the quarter and the first half of the year respectively, net capital spending was 5.4 million and 10.5 million and adjusted free cash flow was 2.7 million and 10.2 million. Looking at our balance sheet at June 30, cash was 13 million compared to 21 million at December 31, which reflects the use of cash in the completion of our debt restructuring in the first half of the year. As noted on our last call, in April, we successfully repurchase 84 million or 89.3% of our convertible notes in an open tender process. Today, $10 million remains in our restricted cash for settlement of the balance of these notes. At June 30, total debt was 187.7 million and net debt was 171 million compared to 179.6 million and 162.8 million respectively at December 31, 2016. Today, we reaffirm our full-year guidance for 2017. We expect total revenues to be between 229 million and 235 million. We expect adjusted EBITDA to be at the lower end of our range of 59 million to 61 million and we expect net capital spending to be at the lower end of our range of 35 million to 38 million. We expect adjusted free cash flow to be at the high end of our range of 47 million, noting that the timing of CapEx and interest payments will fluctuate quarter-to-quarter. With that, let me hand the call back to Anand. Anand?

[Anand Vadapalli:]

Thank you, Laurie. Let me conclude on slide 9. As my comments on our evolving network capabilities demonstrate, we have a lot of confidence in our core business. Our organic business plan reflects a growth orientation now and into the future. This also serves us well as we opportunistically considers the right kind of strategic opportunities to enhance shareholder value. I look forward to reporting progress on all fronts in the future. I'd like to note that I’ve planned to be in New York the first week of September for the Drexel Hamilton TMT conference. If any shareholder would like to schedule a meeting while I'm in New York, please reach out to Tiffany Smith and investor relations. With that, let me open the call for question. Operator?

[Operator:]

[Operator Instructions] We’ll go to our questioner now. Please go ahead.

[Barry Sine:]

It’s Barry Sine with Drexel Hamilton. Couple of questions if you don't mind. Nice uptick in growth on business services. Could you talk about the driver there and then on a forward-looking basis, could you talk about the funnel? I know in the past, you've had some sizable customer wins. Is there anything that we should be thinking about for the second half of the year that might come online then?

[Anand Vadapalli:]

Barry, thank you for the question. I think the performance has been generally across the board in our enterprise and carrier segment, which is actually goodness that it's a diversified set of opportunities and wins that we've had. And from a delivery funnel perspective, as I noted -- and by the way as I noted in my prepared remarks, our sales performance through the first half of the year actually has exceeded the internal targets that we had for ourselves, which is goodness that we continue to perform in the marketplace and which of course translates into a delivery funnel that is very robust with delivery schedule over the next two to three quarters. Some of these are longer lead time deliveries. So they'll extend out a few quarters, but then this also gives us good visibility into the delivery funnel, which translates into revenue visibility for the next few quarters. So I think our performance in the market in business and wholesale continues to be strong. We are pleased with that and look forward to reporting progress as we go forward.

[Barry Sine:]

Okay. And then similar question on the consumer side of the business. The rate of decline has moderated both year-over-year and sequential, but you're still in decline and I know you have an aspirational goal of stabilizing that business. Again, is there anything over the next several quarters, broadband deployment and things like that that you can point to that might be noticeable in terms of the quarterly results over the next couple of course in consumer?

[Anand Vadapalli:]

Yes, Barry. I think we continue to target stabilizing the consumer business. A couple of things that I would point out. If you recall on previous calls, I talked about certain deployments that we had done using Wi-Fi, in-building Wi-Fi for multi-dwelling units. We did that on the military base here in Anchorage. I'm extremely pleased with the response rate and the penetration we're getting in these MDUs. And now particularly, as I look at fixed wireless as an access technology, if you recall, we had talked about fixed wireless previously as an opportunity for our CAF II program as we have prior that, we actually have some pilot customers running on an alpha basis right now. We are very encouraged with the results that we are seeing for fixed wireless and frankly that gives me optimism that I can look at fixed wireless more broadly in our access network, not just for the CAF II program. So on the consumer side, we have traditionally been limited by the footprint of our network and our goal was selling into the network we have. Now, as I look at some of these Wi-Fi based opportunities and MDUs as I look at the potential for fixed wireless, I actually think it gives us some interesting opportunities on the consumer side that we may not have had before and some of these certainly are also equally extensible to what I would consider the small business segment as well. So that's what I would have you look at as we think about opportunities over the next year or so in terms of potential.

[Barry Sine:]

And then just a little bit on the fixed wireless. So you mentioned the frequencies that you're trialing with that and obviously those are seemingly lower in the bandwidth in some of the 5G deployments that are talked about in urban markets to the lower-48 with positive implications for throughput. What kind of distances are you talking about? What kind of bandwidth are you getting in these trials and then lastly our fixed wireless, is this just a trial or just contemplated towards going to our actual deployments anytime in the near future?

[Anand Vadapalli:]

So let me start with the last question first. I think based on everything that we are seeing with our trials, I would have an expectation that we would start moving into commercial deployment. I don't want to get into a specific timeframe right now, but I certainly expect to move into a commercial deployment as we move forward. Again in terms of speeds and throughput, it's -- let’s just put it this way. It's a very competitive solution that works very well for the kind of applications that one would typically think about in the consumer space. And in terms of the spectrum and the distances, I think one of the advantages that we have is that we certainly will push for fiber backhaul as much as possible to the fixed wireless access points that we have in a building or a neighborhood. And frankly as some of the national providers move into their own 5G deployments, which will increase the density of small cell deployment in metro markets, we think we're very well positioned to serve as a backhaul provided for those deployments, which frankly will help us with our own fixed wireless deployment as we improve the density of fiber in our access market. So this solution will be very competitive and not just for now, but into the future and again in terms of distances, again, I'll get more specific in terms of the technology and the performance characteristics that we're seeing as we get into the commercial deployment mode, but certainly I can say that we're pleased with the results we're seeing today.

[Operator:]

And that will conclude our question-and-answer session. I’d like to turn the conference back over to Anand for any additional or closing remarks.

[Anand Vadapalli:]

Thank you so much. We appreciate you joining us today and we look forward to speaking with you in the upcoming quarter. Thank you all. Have a good day.

[Operator:]

That does conclude today's conference. We thank you for your participation. You may now disconnect.